Explained: What Snap Elections Mean For France's Public Finances

President Emmanuel Macron's surprise decision to call a snap parliamentary election calls into doubt France's already challenging deficit reduction plans by putting the spendthrift far-right within reach of power.

Stung by massive gains from the right-wing National Rally (RN) in EU parliamentary elections, Macron called the election on Sunday.

What is the state of public finances?

The government had been already been under growing pressure from ratings agencies, the national fiscal watchdog and the International Monetary Fund to detail 20 billion euros in budget cuts planned this year and as much again next year.

The budget tightening - now unlikely to go ahead - was deemed necessary to cut the public sector deficit from 5.5% of economic output last year to below an EU limit of 3% by 2027.

The government was left with little choice but to rein in spending this year after the deficit overshot its 2023 target by a wide margin owing, in large part, to an unexpected drop in tax revenue.

The misfire prompted Standard & Poor's to cut its rating on France's sovereign debt last month, the second of the three big agencies to lower its view in little more than a year.

What far right rules mean for France

Though parties have yet to put their platforms together for the snap election, the RN plan is likely to be massively costly for the public finances, judging by proposals from the last parliamentary election in 2022.

It proposed then to lower the retirement age to 60 from 64, which Macron raised last year from 62 after weeks of protests, severely depleting his political capital.

The RN also wants to renationalise toll road operators, exonerate workers under 30 from paying income tax and axe inheritance tax for the poor and middle classes.

They would also cut value added tax on petrol, heating fuel, electricity and gas to 5.5% from 20% while increasing health spending by 20 billion euros.

The Institut Montaigne think-tank estimated that all told the cost could reach 100 billion euros, or more than 3.5% of gross domestic product.

If a left-wing coalition were to emerge triumphant from the elections, spending is also likely to surge and probably only partly be offset by tax hikes on the wealthy and companies.

Even if Macron's camp is able to cobble to together a new ruling coalition, the government will face huge pressure to ease off the spending cuts that had been in the works.

What are the consequences with France's EU partners?

With little prospect of sticking to its current deficit targets no matter who wins, France could soon be on a collision course with its EU partners over its public finances.

EU governments agreed in December a reform of their fiscal rules, allowing more time to cut public debt from record post-COVID levels while creating incentives for investment.

But even under the revised rules, France is already struggling to meet its spending and debt reduction obligations, facing the prospect of infringement proceedings and potentially a fine of 0.05% of GDP every six months for failure to comply.

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